The giant ¥10 trillion ($91.1 billion) University Endowment Fund that Japan plans to launch in March to reverse a downtrend in the country's output of cutting-edge academic research will also promote the emergence of U.S.-style endowment funds as a key component of Japanese university finances, government officials say.
The ambition is more than just managing the ¥10 trillion the government has pledged for the fund, said Sho Ito, the Tokyo-based bureaucrat in charge of the program as deputy director of the Cabinet Office's Bureau of Science, Technology and Innovation, in a recent interview. "We want to change Japanese universities and we want to change (Japan's) investment culture as well," he said.
The fund — to be managed by Japan Science and Technology, a funding agency along the lines of the U.S.'s National Science Foundation — will look to garner real annual returns of at least 3% or $3 billion a year, to be distributed to a select group of top Japanese research universities in the form of matching funds for money they raise for their own endowments, said Takahiro Ueyama, a Tokyo-based executive member of the Cabinet Office's Council for Science, Technology and Innovation — chaired by Prime Minister Yoshihide Suga.
Legislative changes due to be enacted after the next regular session of Japan's parliament starts in January will lay the legal groundwork for national universities in Japan to set up endowment funds with the operational capabilities of their counterparts in the U.S. and Europe, Mr. Ueyama said. The past 10 to 15 years have seen a number of universities set up funds to accept donations but they've operated under considerable constraints and made only marginal contributions to their sponsors' finances, he said.
The University Endowment Fund plan will effectively apply, on a broader scale, the formula Singapore's government has used to accelerate the buildup of endowment funds at institutions of higher learning there, led by the National University of Singapore, Mr. Ueyama said. With the help of a government policy giving universities in Singapore $1.50 for every $1 they raise from donations or other sources, NUS currently boasts an endowment of $4.8 billion — by coincidence, roughly the size of Harvard University's endowment in 1990 when Jack Meyer took the helm at Harvard Management Co. When Mr. Meyer departed 15 years later, investment gains and continued donations had swelled the endowment's size to $25.9 billion. As of its June 30, 2020, fiscal-year close, Harvard's endowment remained the world's largest with $41.9 billion.
"That is the scheme," Mr. Ueyama said. More than just showering universities with money, the program is designed to help them restructure their finances, leaving recipients better positioned to sustain the high level of research needed to go toe-to-toe with top ranked universities around the world, he added.
Final selections have yet to be made and the government is hammering out requirements — including targets for growing their endowments — that universities will have to accept to tap into the giant endowment fund's investment gains. Current plans call for anywhere from four to eight top research institutions to be chosen, Mr. Ueyama said.
Within five to 10 years, those leading Japanese research universities should be able to boast their own multibillion-dollar endowment funds, Mr. Ueyama said.
For now, Mr. Ito said, work on launching the University Endowment Fund is continuing, with a government experts committee looking to reach conclusions by the end of July on the fund's payout ratio and its risk tolerance levels — including the composition of the fund's reference portfolio.
The government committee won't decide the fund's asset allocation mix, Mr. Ito said. Instead, the investment management team fielded by the Japan Science and Technology Agency will begin addressing that topic in August, with investments set to commence in March.
A major step toward the start of investment operations was reached recently with the June 1 selection of Masakazu Kita — managing executive officer with Norinchukin Bank, one of Japan's most experienced investors in alternative asset classes — as the endowment fund's chief investment officer, Mr. Ito noted.
One Tokyo-based investment consultant, who declined to be named, welcomed the selection of the veteran alternatives investor as a valuable injection of expertise in a process which, he contended, has so far been dominated by people with scant experience in managing portfolios.
Meanwhile, the reference portfolios of top overseas institutional investors the government's experts committee has spoken with or studied in recent months all boast equity allocations considerably higher than the 50% target of Japan's highest profile asset owner, the ¥177.7 trillion Government Pension Investment Fund, Tokyo. For example, the reference portfolio for Singapore's GIC Corp., with estimated assets of more than $400 billion, has a 65% equity weighting while two big sovereign wealth funds — the $77 billion, Juneau-based Alaska Permanent Fund and the NZ$58.6 billion ($41.7 billion) Auckland-based New Zealand Superannuation Fund — both have equity allocation targets of 80%.